Medical expense tax deductions – is the glass half full?

CAPE TOWN – There have been several findings and changes to tax laws over the past three years relating to the deduction of medical expenses and any expenses incurred in consequence of a disability (“qualifying medical expenses”). One of these findings and changes is discussed below. Because of the change, it is considered that if all appropriate claims are made by taxpayers the proverbial glass will in fact be “half full”. That is to say that, “prima facie” more than half the number of South African taxpayers should be able to deduct all their qualifying medical expenses for the 2010 tax year of assessment.

Broadly, the reason for this assertion is that a substantial proportion of our taxpayer population is either (a) over 65 or (b) that one member of the taxpayer’s family suffers from a “disability”, as defined. With effect from March 1 2009, the old definition of a “handicapped person” has been replaced by a definition of “disability”. It is this change in law and its wider meaning than the previous definition which should mean that a significant number of additional taxpayers are entitled to deduct all their qualifying medical expenses.

It is noted here that qualifying medical expenses of the entire family and not just those in relation to the person with the disability can be deducted. In order for the taxpayer to be able to deduct all his or her expenses, it is not a requirement in our law that any expenses are incurred in respect of the person with the “disability”. The requirement is only that the taxpayer, his spouse, or his or her child suffers from a “disability”.

A “disability” means a moderate to severe limitation of a person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment if the limitation has a prognosis of lasting more than a year (or has lasted for more than one year). The disability must be diagnosed by a registered medical practitioner.

There are a number of reasons why so many taxpayers should be able to claim all their qualifying medical expenses by virtue of the disability provision, namely: –

(1) The wide nature and number of people affected by the various illnesses and impairments. In addition to the old “handicapped person” definition, the new provision could include any other physical impairments such as HIV/Aids, cancers, lung, cardiac, liver and kidney diseases, diabetes etc. The number of physical impairments is substantial and it is believed that all will qualify under the new provision provided the conditions regarding functionality and duration are met.

(2) There are over 200 listed mental impairments; they are listed on the Diagnostic and Statistical Manual IV (“DSM IV”). Depression is the most diagnosed mental illness and affects approximately 10% of people. Because of the current recession it is understood that the number of diagnosed cases of depression has increased. ADD/ADHD is prevalent among school children; severe cases of insomnia, panic and anxiety attacks, obsessive compulsive disorder, anorexia, obesity, alcoholism, drug addiction, bereavement (to list just some of the mental impairments) are not uncommon and are all mental illnesses included on the DSM IV. Roughly, about 20% of people are affected at some point by a mental impairment.

(3) The majority of deceased estates should be able to deduct all medical expenses as a severe physical impairment must have been present prior to date of death. Paradoxically though, taxpayer’s who die suddenly, or accidentally, may not qualify because they are unable to meet the one year prognosis test. This anomalous situation has been raised with Sars and it is not yet known whether Sars will, as a matter of practice, allow all deceased estates to deduct all their qualifying expenses.

(4) The deduction is not taxpayer specific unlike the over 65 provision (i.e. the over 65 provision does not apply if the taxpayer’s spouse is over 65). In the case of “disability”, the requirement is that 1 person of the taxpayer’s “immediate family” (spouse or child) must suffer from a disability in order for all expenses to be allowable. Because of the broad definition in our law (of the meaning of child), the diagnosis of 1 “disability” can in certain circumstances mean that 4 taxpayers could claim all their expenses. A situation, for example, could be where a child has been diagnosed with down syndrome and the child’s parents are divorced and both are re-married. In that case, the biological parents qualify as well as the step-mother and step-father. Because of the way the law is drafted, all 4 taxpayers may deduct all their qualifying medical expenses.

Whether or not a taxpayer will be entitled to deduct all qualifying medical expenses will depend on the precise facts and circumstances of each taxpayer. In many cases, careful consideration and advice will be required as it may not always be clear cut whether all the requirements in terms of the new definition of “disability” are met. Notwithstanding this, in general it is considered that it is more likely than not that a taxpayer will be able to deduct all qualifying medical expenses for the reasons discussed above.

Maximisation of expenses, therefore, becomes relevant for a much larger population of taxpayers and specialist guidance in this area is recommended in order to ensure the most optimum tax result. In particular, taxpayer’s are not always aware that they can deduct all expenses incurred in consequence of any physical impairment or “disability”, as defined. Depending on the impairment or disability the deductible expenses can be substantial as they, unlike other provisions, can include private and/or domestic expenses. This would include capital expenses such as modifications to properties and cars, and specialized computer equipment. Other expenses could include school remedial fees, staff costs, travel expenses (including costs of air travel in certain circumstances). As a result of another change of law effective from March 1 2009, expenses of all dependants on the taxpayer’s medical scheme may be deducted.

There are a number of other issues to consider in relation to tax and medical expenses. Suffice it to say that with the ever increasing costs of healthcare and costs associated with ill-health, the tax provisions in this area of tax law should be carefully addressed by taxpayers as a way of saving tax and/or obtaining tax refunds in respect of prior-years.

Bendels Consulting® was founded in February 2007 and is a niche tax consulting practice. For the past nine years we have specialised in the provision of tax compliance and tax law advisory services to individuals where there is a “disability” in the family.